In previous columns we have looked at how critical it is that you make the best possible decision about how you structure your farm business, and we have looked in detail at proprietorships, partnerships and incorporation.
Another process we are using more and more often is the joint venture.
A joint venture may provide you with a mechanism for a new partner or family member to share in the growth of the business unit.
An advantage with joint ventures is their limited nature. They are only an agreement to work the business together, so there is no change to the original business structure.
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Because of this, a joint venture can be used to allow everyone a chance to see if there is the compatibility and desire to work together.
Importantly, the joint venture allows the sharing of net profits versus gross revenue.
The joint venture is a working or operating agreements between parties. This is particularly beneficial to parties where there is an unequal value of assets or equipment. One participant maybe an individual and another may be a corporation. This can be the situation for example on a farm where an adult child comes into the farm operation with an eagerness to work but with little or no equity, and the more established farm family members may have their own farm corporations.
The agreement can allow for the joint venture to run one bank account for all expenses and incomes. The net income flows out to the participants, partnerships or corporations based on the agreed ownership at the start.
In our discussions with farm family operations, this becomes extremely beneficial should the joint venture not be successful. The dissolution of a corporation when shares were gifted comes with many pitfalls, whereas the joint venture ceases and everyone goes on again in their own roles. All the assets are owned by each party based on what comes into the joint venture.
When there are two corporations, each company has its own assets and signs its own debt agreements. When one party owns more land, this can be resolved by leasing all the land to the joint venture. The joint venture would pay all the costs and the fairness is maintained.
It is important to note that if one party is providing a small portion of capital or labour, a fairness test should be reviewed. The financial institution will want to review the joint venture agreement and the balance sheets for their due diligence.
Payment for a person in a management or labour role is a consideration, but my recommendation is that you don’t go overboard with the splits. The agreement should stipulate the roles that must be performed and who will perform them, and there should be compensation for the actual work, but remember that the purpose of this agreement is to complete specific projects or operate a business with different ownership.
The agreement should stipulate a mechanism for dispute resolution.
Also remember that, in business, good documents make good partners. Before launching a joint venture, do please seek professional advice from the legal and accounting fields, as well as from your planner. If you cannot agree on the business documents, then how could you deal with an issue in the future?
The negative stories usually are the ones where everyone has tried to do things the easy way. It pays instead to put the effort into producing a clear agreement that is clearly understand by everyone who signs it. Interpretations can differ from one to another party, so ask some hard questions at the start to prevent the fights in the future.
MY TOP ITEMS TO NOTE ARE AS FOLLOWS
Communication
So often we see situations where a little issue grows into a major sore point. In our experience, it is often a personal issue, not a business issue at all, and it may have been building for a long period. This can be addressed in a family meeting, not a business meeting. Build an agenda for your meetings and do not make any personal comments in this meeting. Rotate the chairperson of the meetings and stick to the time limits and the agenda.
Don’t try to correct everything in one meeting. Instead, be sure to prioritize. We suggest that you have a huddle every morning as a way to determine what needs to get done. This is also a good way for everyone to know what is going on.
A work list in a common area on a white board can also be a good idea. Everyone can write items on it that they think are important to get complete. Also, if people need time off for a children event, business meeting or a health care appointment, it can be easily planned for.
Respect
I have seen family members treat other family members without respect. I’m sure you know of such family situations too. People can say things to other family members that they would never say in a non-farm board meeting.
If everything works as it should, the business meeting will evolve into a family meeting. Remember though that it is a business meeting, especially at the start. Be mindful of personal strengths and weaknesses, and remember the generation differences.
Inventory of skills
It is key to understand the skill sets already in the inventory. The flip side is that it can be equally important to know the skills that you don’t have and that you need to obtain in order for the business to flourish.
Build a list of skills that you need to add, and then create a plan to obtain them either by outsourcing or by educating yourselves. Some of these may be skills that you don’t recognize as skills. For instance, the senior partner may always have worked independently, but in the joint venture may have to deal with staff. If they don’t have experience in this role, they may be unaware that it is a major responsibility, and that functions such as job descriptions, hiring, firing, and ongoing reviews are extremely important.
We have documents that can help you with human resource management, and will share if you contact our office.
Family meetings
This is an important event. But that doesn’t mean that it has to be difficult or acrimonious. It should be held at non-work time so everyone can attend. Consider having a barbeque, or going someplace where everyone can relax. (There is always something more you need to do at the farm.)
Then, make sure you take time to identify and celebrate the successes you have achieved by working together.
Don’t start with who is going to seed the north half next day. Make it your personal goal to set a pattern for everyone else. Have some fun, but be on your best behaviour.
Work at this and your life will be better. Remember you can lose big time if this is not done well.
Business
Farmers are a unique group and are apt to keep things close to the vest. When you are in a joint venture, however, you need to be aware that your aren’t the only one. Set goals, write them down, be clear and concise, and let everyone (the inner circle of your business team) know what your operation is planning.
So many times the main goal is to pay off all the debt as quickly as possible. If the farm operation is planning to be in business for the next 30 years, however, why drive yourself to such great stress and rob the day-to-day cash flow to such an extent that no one can enjoy a healthy, happy lifestyle?
I sometimes blame the banking process for this. Equipment loans for instance are on a short-term payout A combine is now worth $300,000 plus and on a five-year repayment schedule this places a lot of pressure on the farm business and family life.
Interest rates are the lowest ever, so why not capitalize your operations for the long term. Take some long term funding over 15 to 20 years on the land to cover the short-term costs. Watch the results in your family life. Your farm business is going to be around for 30 years. CG
Don McCannell is a farm financial advisor and planner, and president of McCannell Financial Group based in Saskatoon. Don can be reached at[email protected],or at 306-382-7777
